What is Probate?

Probate is a court supervised process that includes collecting and valuing your assets, paying your debts and taxes and distributing your assets to your heirs. As part of this process, a notice of your death is published in a newspaper in order to allow your creditors to make claims against your estate. Probate proceedings are open to the public and anyone can review the court file and examine the details of your financial life. Probate is expensive, with most of the work being done by a personal representative (named in your Will or otherwise appointed by the court) who is assisted by an attorney and, usually, an accountant. The fees and costs of probate can range from perhaps 2-10% of the gross value of your estate. Although using a Revocable Living Trust does not make all costs associated with a death go away, it can significantly minimize them.

How long does it take to go through Probate?

Probate is a lengthy process that normally takes a minimum of six months to complete, with the average time being from nine to twelve months. It is not unusual for the administration of a complicated estate to continue for years.

What is a Conservatorship?

A conservatorship is a court supervised procedure by which an agent is appointed to manage your assets and/or personal affairs, including medical care, when you are not able to do so yourself. Your court appointed agent usually must post a bond, paid out of your estate, must file annual accountings with the court and, usually, must also seek court permission before making major decisions about your property. This procedure is expensive and time consuming, often requiring court hearings and the assistance of an attorney. In addition, the individual appointed as Conservator is entitled to reimbursement for necessary expenses and to reasonable compensation for his or her services, all paid from your estate. Because the court is involved, a conservatorship is a matter of public record (including the nature of your estate and your physical and mental condition). A better approach is to have a Revocable Living Trust since your successor Trustee can manage your assets and often entire avoid the need for a conservatorship of your estate.

What are Death Taxes?

Separate from the expense and delay of probate, your estate may also be liable for death taxes. These taxes (also called estate or inheritance taxes) are paid on transfers of property at death.

There are two types of death taxes: the federal estate tax and the state death tax. California’s estate tax, known as a “pick-up” tax, is equal to a credit given by the federal government for payment of state death taxes attributable to assets located in California. In other words, the overall amount of estate tax due is the same; California merely takes a share of the federal tax. However, if you own certain assets (i.e., real property) in another state, that state will take a percentage of the “pick-up” tax and California will take the balance. In addition, other states may assess a separate inheritance tax, over and above the “pick-up” tax.

Beginning January 1, 2002, the state death tax credit was reduced by 25% for decedents dying in 2002. That credit will be reduced by 50% for decedents dying during 2003 and by 75% for decedents dying during 2004. For decedents dying after 2005, no credit can be taken for payment of state death taxes, effectively terminating the “pick-up” tax. Instead, a deduction will be allowed against the federal death tax for any death taxes that may be separately imposed by a state. Treating the state death tax as a deduction, rather than a credit, could result in higher overall death taxes. As of 2003, California does not have a separate state death tax.

Why Do I Need Estate Planning?

Estate Planning involves the creation of a definite plan for managing your wealth while you are alive and distributing it after your death. A properly prepared estate plan can do all the following: 1) provide for the care of you and your family during times of disability or incapacity; 2) determine who will care for your children after you are gone; 3) determine who will inherit your assets (and when they will inherit those assets and in what amounts); 4) avoid probate; and 5) reduce death taxes.

Isn’t a Will Sufficient?

A Will is a vital part of your estate plan. Through a Will, you can appoint a guardian for your children and can name an executor to see that your assets are distributed to your heirs and that death taxes are paid. However, a Will alone does not avoid the time and expense of probate, nor does it allow you to take advantage of certain steps that can reduce the burden of death taxation. In addition, upon your death, the provisions of your Will and the resultant distribution of your assets through probate are open to public scrutiny.

What are the Benefits of a Family Limited Partnership?

A Family Limited Partnership (FLP) is frequently used as a foundation for a well-organized estate plan. An FLP can consolidate asset ownership, thereby decreasing the overall investment and management costs of multiple investments. It can provide asset protection, and continuous ownership of property within the family unit, by limiting or preventing access to the assets by creditors or former spouses. It simplifies annual gifting of assets to future generations, while allowing you, as the general partner, to maintain control over the assets. It can also reduce the size of one’s estate that would be subject to death taxes by allowing accelerated transfers to future generations at reduced values. An FLP is also flexible in that, unlike an irrevocable trust, the provisions of the FLP can be amended to meet changing circumstances without court intervention, if all partners agree. Because of the restrictions on transfers, an FLP is typically valued at a discount, compared to the value of its individual assets, thus potentially providing a savings in transfer taxes at death.